But the IMF warned richer nations were still growing below full
capacity, and it added the specter of deflation to its long list of
risks that could derail the nascent recovery.
In an update to its World Economic Outlook report, the Fund
predicted the global economy would grow 3.7 percent this year, 0.1
percentage point higher than its October projection. It said it sees
growth of 3.9 percent in 2015.
Olivier Blanchard, the IMF's chief economist, said less government
austerity and uncertainty, and a healthier financial system, were
all allowing growth to speed ahead.
"The basic reason behind the stronger recovery is that the brakes to
the recovery are progressively being loosened," Blanchard told
reporters on a conference call.
The IMF forecast higher growth in advanced economies this year but
kept its outlook unchanged for the developing world, where higher
exports to rich nations were expected to be offset by weak demand at
The United States is likely to be one of the bright spots, after a
budget deal in Congress reduced some of the government spending cuts
that had weighed on domestic demand.
U.S. data last month showed a build-up in business inventories, the
most since 1998, helped boost third-quarter GDP, and the IMF expects
domestic demand to lift growth to 2.8 percent in 2014. In its
previous forecast in October, it looked for growth of 2.6 percent.
The IMF also saw a rosier outlook for Britain, amid cheap credit and
greater confidence. It raised its growth forecast to 2.4 percent in
2014 from 1.9 percent in October. It was the largest increase among
Japan's prospects also surprised to the upside, as the IMF predicted
further fiscal stimulus should help offset some of the impact from a
higher consumption tax planned for this spring. However, the Fund
said Japan must focus on consumption and investment to keep growth
sustainable, rather than relying on government spending and exports.
Japan launched an ambitious economic program last year to shock the
economy out of nearly two decades of deflation.
The IMF warned other rich nations now risk the same problem of
sluggish price growth, which can happen when economies linger well
below their full potential. Disinflation can turn to an economically
debilitating deflation if there is a negative shock to economic
activity, the IMF warned.
A falling spiral of prices would weaken demand by making cash more
valuable over time, discouraging consumption. It also increases the
burden of debt, a big problem for highly indebted places like the
United States and the euro zone.
"The lower the inflation rate, and ... the larger the deflation
rate, the more dangerous it is for the euro recovery," Blanchard
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The IMF urged central banks to avoid raising interest rates too
soon, and called on the European Central Bank in particular to help
sluggish demand by boosting credit growth.
Bank lending has decreased in many crisis-ridden southern European
countries. But banks had previously used the bulk of cheap loans
from the ECB to buy government bonds instead of loaning to the real
economy, showing the limits of monetary policy.
The IMF warned that some developing countries, especially those with
large current account deficits or domestic weaknesses, could be hit
hard by capital outflows this year as the U.S. Federal Reserve
begins to scale back the pace of its asset purchases. The IMF
expects the Fed to wait until 2015 before it raises its policy rate.
The IMF urged vulnerable economies to let their exchange rates
depreciate, or consider tighter monetary policy or stronger
regulation or supervision.
Central banks may not have much room to act in emerging markets,
many of which are growing close to full capacity.
For such countries, "the main policy approach for raising growth
must be to push ahead with structural reform," the IMF said.
It particularly singled out China, calling on the world's
second-largest economy to move more quickly towards consumption-led
growth, and away from investment.
"On the internal front, perhaps the main challenge is faced by
China, which needs to contain the building of risks in the financial
sector without excessively slowing growth, a delicate balancing
act," Blanchard said.
After 30 years of sizzling growth that lifted millions out of
poverty but devastated the environment, China wants to change tack
by embracing sustainable and higher-quality development.
That means reducing government intervention to allow financial
markets to have a bigger say in allocating resources, and promoting
domestic consumption at the expense of investment and exports.
As the changes start to take effect, the IMF expects China's economy
to grow 7.5 percent this year, and 7.3 percent the next, which would
be among the lowest rates in more than a decade.
(Reporting by Anna Yukhananov; editing
by Chizu Nomiyama and Tim Ahmann)
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